Principles of Nonprofit Investment Management - Commonfund

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PRINCIPLE SIXCostsContinually ask: “Can we get the same results for less?” The costsof your investment program can quietly undermine returns andcut into the corpus of the nonprofit’s assets. Make sure you keepinvestment costs under control.- 26 -
CostsVarious changes in the investmentindustry during the postwar decadeshave helped raise the awareness ofinvestment costs. Some argue that costcontrol is the key to investment success,since in the long run no investmentcan beat the averages.Cost control lacks glamour; no oneaspires to the job. It requires detailedanalysis, review and monitoring, bothbefore selecting a manager and then onan ongoing basis. In addition to investmentmanager fees, a host of otherinvestment costs must be watched:custodial, legal, accounting, consulting,overhead. Cost increases can besurprising and difficult to restrain.Controlling the cost of investmentmanagement involves three typesof activities:◆ Diligent investigation of alternativeinvestment management candidates◆ Tough negotiation of fees◆ Efficient management of themanagement firmsYou need to look at the prospectivemanager’s portfolio turnover rate. Inother words, how much buying andselling does the manager do to achieveits results? Every transaction incurscost; good management means avoidingneedless transactions. Are the managersnegotiating the best prices fortheir investors? Are the managers’ feesand compensation structure alignedwith their investors’ interests?You need to continually ask: “Can weget the same results for less?”But keep in mind that cost reductionitself can have a cost. For instance, youdon’t want to compromise the effectivenessof your risk management forthe sake of cutting costs, or settle forless than optimal diversification. Keepthe balance.It is also important to recognize thatdifferent investment products can havesubstantially different costs and coststructures. Understanding thesedifferences is important in evaluatingthe costs. Many managers, particularlyin alternative asset classes, have a basefee, plus incentive fees which can besubstantial. Ultimately, the importantissue is total return on the asset net ofthe costs.- 27 -
Page 1: Principles of Nonprofit Investment
Page 4 and 5: Contents3 BasicsBeginning at the be
Page 6 and 7: PRINCIPLE ONEObjectivesThe governin
Page 8 and 9: The committee’s deliberations wil
Page 10 and 11: PRINCIPLE TWOPayout PolicyThe board
Page 12 and 13: Payout Policies for EducationalInst
Page 14 and 15: They could then calculate the payou
Page 16 and 17: PRINCIPLE THREEAsset AllocationAllo
Page 18 and 19: Since the introduction of the UMIFA
Page 20 and 21: Many such analytical tools are avai
Page 22 and 23: PRINCIPLE FOURManager SelectionThe
Page 24 and 25: Selecting investment specialists ha
Page 26 and 27: PRINCIPLE FIVERisk ManagementYou sh
Page 30 and 31: PRINCIPLE SEVENResponsibilitiesTo p
Page 32 and 33: References andResourcesDow 36,000:
Page 34 and 35: About CommonfundCommonfund provides
Page 36: Commonfund15 Old Danbury RoadP.O. B

Principles of Nonprofit Investment Management - Commonfund

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